‘Securities’ is a broad term used to refer to financial instruments that hold some kind of monetary value. The term ‘securities’ encompasses both debt and equity instruments, as well as hybrid instruments that combine elements of both.
An introduction to securities
Securities can be broadly classed as equity securities such as ASX shares, or debt securities such as bonds:
- Equity securities: The most obvious example of a security is a share or stock. Equity securities, such as ASX shares, give an ownership interest in the underlying entity. This does not usually give the security holder the right to payments, but many ASX companies do pay dividends to shareholders. Shareholders can also benefit from capital gains if the share price rises.
- Debt securities: Debt securities are different. They represent borrowed money that must be repaid to the security holders. Terms such as the interest payments and maturity date are set, with debtors ranking ahead of shareholders in the event of an insolvency. Debt securities include government and corporate bonds, as well as other instruments which require the payment of interest and repayment of principal.
Some securities feature both debt and equity elements. Examples of these include convertible bonds and preference shares.
Convertible bonds are debt obligations that can be converted into shares of the issuing company. Preference shares give their holders the right to payments that are prioritised over payments to other shareholders.
Is a security the same as a share?
A stock or share is a type of security. But there are many other types of securities. While all shares are securities, not all securities are shares. However, shares are popular securities and tend to receive more publicity than other types of securities.
Should I start investing in securities?
Investors can generally choose to invest in property, cash, fixed interest, and shares. If you invest in shares or fixed interest, you will be investing in securities.
It is also possible to invest in property using securities by investing in property trusts. If you have superannuation, chances are you are already investing in securities – your superannuation fund will have invested your funds on your behalf.
Whether you should start investing in securities ultimately depends on your financial situation and long term financial goals. Investing in securities can be a good way to build wealth as the return on debt and equity securities is usually greater than the return on cash in the bank.
If you want to start investing, you will need to consider what type of securities best meet your needs and risk profile. Those who are unwilling to risk too much capital will likely prefer debt securities. People who are more willing to risk more capital in pursuit of higher returns may prefer to invest in equity securities.
What are the pros and cons of investing in securities?
There are both pros and cons to investing in securities. Historically, the Australian share market has gone up over time, helping investors to grow their money. On the other hand, share markets can be subject to steep declines, as seen at the onset of the coronavirus pandemic. This can result in investors losing significant money.
Investing in securities can provide a hedge against inflation and allow investors to benefit from economic growth. It is relatively easy to buy and sell securities, and they can provide an additional form of income in the form of dividends from shares or interest payments from bonds.
On the other hand, there are risks involved, including the possibility of losing your entire investment. The share market tends to fluctuate, which can exact an emotional toll on investors. Investing also requires significant research into the securities you are looking to buy.